It's an open secret that many of America's largest banks are "zombies" - institutions that are able to carry on despite having a negative net worth, thanks to "a combination of implicit and explicit government credit support."
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"Masters of Illusion: Bank and Regulatory Accounting for Losses in Distressed Banks," is a new @INETeconomics paper by Boston College finance prof Edward J Kane, revealing collusion between bank accountants and financial regulators to conceal losses.
ineteconomics.org/research/resea…
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Bank accountants want to help their employers stay solvent, while regulators don't want the public to spook and stampede, which would cause a run on the bank. All this is laid out in a layperson-friendly article accompanying the paper
ineteconomics.org/perspectives/b…
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Taken together, accountants and regulators have a "disposition toward supervisory informational deception and regulatory forbearance" and during crises, this comes to the fore, allowing zombie banks to borrow even more money under the expectation that they will be bailed out.
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The degree to which banks are guaranteed to be solvent regardless of recklessness and deception means that any time you see an insider running away from a bank, you should assume that things are REALLY bad.
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Kane: "The processes through which bankers extract benefits from the safety net closely resemble those of embezzlement and the rewards bankers garner usually rise to the level of grand larceny...
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"The difference between street crime and safety-net abuse lies mainly in the class and clout of the criminal and the subtlety of the crime."
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And as ever, a chart tells quite a story: the Big Four accounting firms failed 808 audits between 2009-17, and faced only 53 enforcement actions.
Image: Cat
flickr.com/photos/catwomm…
CC BY-NC-ND
creativecommons.org/licenses/by-nc…
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